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Whipping Up America’s Inflation Bogeyman

Summary:
Recent price increases in the US, and demands for a forceful response by the Federal Reserve, have brought back memories of the 1970s and all of the economic and political disasters of those years. To avoid repeating past mistakes, policymakers must recognize that today’s inflation is not a macroeconomic issue. AUSTIN – The headline chosen for Harvard economist Jason Furman’s November 15 commentary in the Wall Street Journal was both apt and sad. It was apt, because it repurposed then-President Gerald Ford’s “Whip Inflation Now” slogan from 1974, and sad because Furman’s advice comes straight from that era – and because his prescriptions could reprise the economic and political disasters of those years.

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Recent price increases in the US, and demands for a forceful response by the Federal Reserve, have brought back memories of the 1970s and all of the economic and political disasters of those years. To avoid repeating past mistakes, policymakers must recognize that today’s inflation is not a macroeconomic issue.

AUSTIN – The headline chosen for Harvard economist Jason Furman’s November 15 commentary in the Wall Street Journal was both apt and sad. It was apt, because it repurposed then-President Gerald Ford’s “Whip Inflation Now” slogan from 1974, and sad because Furman’s advice comes straight from that era – and because his prescriptions could reprise the economic and political disasters of those years.

Furman, formerly the chair of President Barack Obama’s Council of Economic Advisers, writes that “ultimately inflation is a macroeconomic problem,” meaning it is an issue that afflicts the economy as a whole. In exploring the causes of the problem, Furman writes of “rapid recovery,” “tight labor markets,” excessive fiscal stimulus, and too-easy money. The US economy, in his telling, has too much spending pressing on its capacity to produce. It is too big.

Except that it’s not. According to the latest GDP report, the actual size of the US economy – measured in inflation-adjusted dollars – is still smaller than it was in the last quarter of 2019. Americans are spending and producing in real terms less now than we did then. For all the hot air about high growth rates, low interest rates, and big deficits, America is not even back to the starting gate. That means there is no way that our current inflation rate is “macroeconomic.”

Furman goes on to insist that “it’s the Fed’s job to keep [inflation] under control.” That also is not true. The US Federal Reserve operates under the Full Employment and Balanced Growth Act of 1978, which stipulates that full employment and reasonably stable prices are goals for the US government as a whole.

The drafters of that law – I was among them – did not buy the dogma that inflation “is always and everywhere a monetary phenomenon,” as Milton Friedman had

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